Thursday, June 3, 2010

What Happen When You Purchase A Stock?



Imagine this, one day you wake up in the morning and feel like buying a stock. Take IOI Corp. for example. So you went on and call your broker or used an online trading tool provided by most brokers today to check the market value of IOI Corp. And you are given a quote that it is selling at RM4.91 per share (take today's closing price for example). After doing all your analysis, you felt that RM4.91 is a fair asking price to pay and you went on purchase say 1000 units of shares.

Okay, what you just did, is not just purchased 1000 units of stocks with a symbol named IOICORP or stock code of 1961 like what most people would have thought. What you just did is, you just bought as small piece of a business engaged in cultivation of oil palm and processing of oil palm registered under a name called IOI Corporation Bhd. Yes, you are part of thousands others who own this corporation with 1000 shares or 0.00000016% of the business.


What happen next? You have a CEO managing your business for you, who also happens to be your group director and owns 42% of your company. Not only that, you also have COO, CFO along with others, factories, refineries, that 0.00000016% piece of land and etc: a working established business. Cool huh.....

When you see earnings per share in IOI Corp annual report Income Statement due next quarter, that is YOUR EARNINGS times the 1000 units that you own. It is YOUR MONEY. Alright, when you own a business, rationally you want your business to keep operating if it is generating earnings right? So, you need to pay your employees, buy a new machine, or even change a new light bulb in the office. You might even think of expanding your business say buying a new land in Indonesia for example. That is why some of your earnings have to be retained for these purposes. Hey, that is your money, who makes the call to keep them?

Your CEO does and sadly, your 0.00000016% of voice wouldn't have help much if you ever decided to keep all your earnings into your pocket. Yes, you are just a minority shareholder. BUT, you should have consider all these factors before you purchase the shares. Come on, be rational. As a business owner, you'll definitely want your business to continue to generate income or grow your wealth for you. Without retaining some of these earnings, there is no way your business is able to sustain either of those.

What you need to make sure is that your CEO and your group of executives are trustable - making right decision. You can check by looking at their past records of management decision making such as the ROE, shares repurchases, special dividends, earnings growth and etc. Whenever management decided to retain your earnings, you better make damn sure that they are making good use of the money. Else, they might as well return those earnings to you so that you can invest elsewhere. (More about how a corporate could grows shareholders wealth someday). Of course, there is no perfect method to ensure that the management won't abuse their power. I'm not naive enough to say that by looking at their historical decisions I could guarantee they'll continue doing that. We'll never know. Investing aren't risk free. You can only minimize it. That's part of the risk I'm taking - and I hope my instinct is right.

What I want to tell today is that, when you purchase a stock, you are not merely buying a stock, you are buying a small piece of a business. The stock market, the brokers and that online tools are just there to facilitate this process. It is the process of buying a share of a public listed company made simple and easy. Probably because of this and its easily accessible market quotation, people tend to treat it and trade it as a stock with a label and a code. They call it "play stock". Don't be surprise if you see most of them have no idea what they are playing with. Yes, you can play, but I hope you know what you are playing.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at luzeeker@gmail.com

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